A central banker to his finger tips, Jean-Pierre Roth said it through clenched teeth: “We are not giving UBS a present”. Here was the head of the Swiss National Bank, the bailiff of bank bail-outs, not to mention the current chairman of the BIS, doing exactly what he said he wasn’t. Namely, giving Switzerland’s most unpopular bank a gift-wrapped package.
The taxpayer will pick up 90 percent of UBS’s toxic debt through the ministry’s $53bn rescue package. Hard-headed observers like Rudolf Strahm, Switzerland’s retired price regulator, point out that even a 300 percent increase in value won’t lift much of the burden off the government/taxpayer.
It is hard to see where UBS is taking the hit, except that it is very much in the hands of the Swiss authorities who will show little mercy.
You cannot blame Mr Roth for putting a brave face on a bail-out that must have pained him deeply, especially as he lambasted US banks way back in August 2007 for their disgraceful lending practices.
Now that the capital-boosting regulations demanded by Basel II have been deemed to be fatally flawed, mainly because they left the job of internal risk assessment to the banks and various incompetent third parties, the whole issue is up for grabs and the hard-liners are in the ascendant.
The Swiss have often punched above their weight in the great regulatory debates and the view of Mr Roth will be important, particularly as head of the BIS but also because of his remarkable prescience throughout this crisis.
Way back in 2007, he predicted “massive losses” across the financial sector. And even before then, as early as December 2006 when most regulators were still hibernating from reality, he warned that we were not facing “lasting prosperity”.
As he told reporters recently: “From a central bank point of view, more [capital] is better than less.”
You can see why, when UBS’s final provision against bad debts comes out at around fifty times higher than its original estimate.
He’s also winning support from the private sector. For one, new Fortis Chief Executive Herman Verwilst muses: “Under Basel II one thought [that] if we measure risks adequately, then we as banks can operate with less capital. That image has changed completely. Perhaps one should hold even more capital.”
There’s an element of retribution in much bank-talk. As Richard Meier, former head of the Swiss stock exchange, warned recently: “Many of the discussions in US, Germany and other countries sound more like taking revenge on these banks rather than helping them.”
However, we now face the danger of the blunt instrument, a response to the crisis that could end up by bludgeoning banks so hard they have difficulty in producing legitimate profits off sensible multiples of leverage.
While sky-high provisioning might indeed have warded off at least the worst of this crisis (for now), there may be simpler, cheaper and in the long-run safer methods of fire-proofing the banks.
George Soros makes the point that profitable banks are generally the safest.
Specifically, he suggests that Hank Paulson’s recapitalisation scheme should be temporarily accompanied by lower minimum capital requirements “so that banks compete for new business. This would also make sense, argues the great fund manager, in the event of the continuing decline in house prices, which of course also affect banks’ capital integrity.
Then with the panic over, normality should strike. “Once the economy returns to normal, minimum capital requirements of banks would be raised again”. This is not the time to punish all the banking sector for the sins of a few.
Indubitably, bank capital-asset ratios have been at historically low levels. According to the BIS, they stand at an average of about seven percent of total assets on a non-risk-weighted basis. And many banks have implicitly recognised this by mega programmes of recapitalisation.
However this has taken the form of panic responses to the frozen interbank markets which, in turn, were triggered by lousy risk assessment programmes.
Here we may have the solution. As more detached observers suggest, why not just improve the method of risk assessment? Ultimately an exercise in best practice, it would be undertaken by gilt-edged third parties rather than left to the banks.
The next thing to address would be the speed of response through, say, the “prompt correction action” procedures that worked so well in the nineties in the US. As Professor Harold Benink points out, a PCA system would have got bank supervisors running at the double into institutions whose capital levels were triggering flashing red lights.
Thus the best banks are not punished by the sins of the few. As Mr Roth knows better than anybody, Switzerland’s regional banks in the communes and cantons acted far more responsibly than UBS.